Wells Fargo

The following is an edited transcript of a conversation between Steve Ellis, Head of Innovation for Wells Fargo and Michael Halloran of The FinTech Blog.

MH: Your have a new role as Head of Innovation for Wells Fargo. Given its record as an innovator, in areas like online and mobile banking, why do you think the bank is not as well known as it should be for innovation?

“Creating the Innovation Group puts an even larger focus on creating the products, services, and technologies that will allow us to stay competitive and allow our customers to do their banking when, where, and how they would like.” – John Stumpf, CEO of Wells Fargo

SE: I’ve seen different waves within the bank and across the broader industry. Right now there’s tremendous interest in innovation.

Innovation has always been there: It’s just sometimes the case that other messages stand out. Take the financial crisis of 2008. During that time, a lot of the energy was put into risk and controls. Or the integration of Wells Fargo and Wachovia. It took a lot of effort. But the innovation story is real.

We have been innovating for a long time. There is remarkable creativity in our organization. There is no lack of ideas. I see our role as to give a voice to ideas, which come from all areas across the bank – as well as outside the bank; it’s so easy to focus on what’s internal and miss what’s going on outside that’s interesting.

MH: How do you see Wells Fargo’s Innovation Group compared with other models? e.g. CitiVentures has a mission, beyond its venture investing, to bring innovation to Citi. Capital One Labs’ mission is to deliver products with big impact, but gets involved in acquisitions (e.g. LevelMoney).

We want to bring focus to the great ideas within Wells Fargo and serve as a catalyst to foster innovation in areas ranging from business models to user experience. We want to innovate across the entire organization — at a time of increased risk and regulatory focus.

We also want to encourage our team members to sit up and look outside the organization for innovation and ideas.

An example of this is the new Wells Fargo Startup Accelerator.

Our Startup Accelerator expands our vision of the future of financial services beyond the boundaries of Wells Fargo and banking, and introduces us to innovators who want to shape how our customers handle their financial needs in the future.

MH: When Morgan Stanley’s Technology Business Development Group put on its CTO Summit, our focus was on innovation, as well as team building and business development. Is that true for Wells Fargo?

SE: Yes. There’s an advantage for us to have early interactions with the startups in the space. The accelerator gives us an opportunity to get involved and connect with the brightest startups from around the world.

MH: What innovation areas are critical to you now? Given Wells Fargo’s current focus on growth in credit cards and wealth management, investments and retirement (WIR), is it in areas like analytics?

I can see us going in a direction of offering identity as a service…

SE: Analytics is a great example of an area rich in innovation opportunities. Others are security and identity management. We’re good at security; as a bank, you have to be strong there. It’s fundamental to our business. The Innovation Group also owns initiatives like mobile wallet services to propel innovation in this important area for Wells Fargo.

We have a lot of good ideas. We literally have received hundreds of good ideas from team members across the company since forming this group. I see it as part of our mission to drive focus and execution on a reasonable number of focus areas, so we’re working on five big ideas vs. five hundred.

MH: I know the innovation group at Bank of America struggled with issue of mission creep by expanding its mission from ‘innovation’ to execution in areas, e.g. social media and mobile, that put it in conflict with areas of the bank that owned those efforts. Is that a risk?

SE: We are a small group by design, and we have to clearly understand our mission and purpose for the company. I was invited to speak at Wells Fargo’s companywide Town Hall with our CEO last week. We talked live with team members across the country about the mission of the Innovation Group.

Internal communications is important, and we want to clearly articulate how we will give a voice to innovation and ideas across the wider organization. Our group will stay focused on our customers – and I’m confident the ideas and solutions will follow with rapid execution.

MH: You mention the Innovation Group is a small organization. Do you think you will bring in individuals from outside to help the team?

SE: We have a lot of interest from Wells Fargo team members in joining the group, and we’ll grow. Would we hire some talented technologists or those with other skills who don’t know banking and teach them about banking? Yes.

MH: As someone who’s worked at a startup and a bank, it frustrates me to hear VC’s say ‘Banks haven’t done anything innovative in the last ten years’ and have people believe them. How do you feel about that?

SE: I’ve been around long enough to recognize that a lot of people who are driving the conversation are pushing an agenda. I’m accustomed to it. We maintain a good relationship with the venture world along with startups.

We think we can innovate with the best. For instance: biometrics. There’s a lot of seriously cool stuff that’s happening in that area.

If you think about it the area of identity management and authentication is one in which the banks are really exceptional. I can see us going in a direction of offering identity as a service, for example.

I think the predictions about what is going to happen in 3-5 years are not as interesting as what’s going to happen in 20 years.

MH: Despite the success of Bloomberg ‒launched with Merrill Lynch as a minority owner – there hasn’t been a lot of consortium offerings from banks. Why is that?

SE: To drive a program through a large institution, you quickly need to get a lot of specific people in meetings who have decision-making power. A consortium, to me, makes the whole process much more difficult. With the right idea, of course, anything is possible.

MH: What do you see when you look ahead?

SE: I think the predictions about what is going to happen in 3-5 years are not as interesting as what’s going to happen in 20 years. There are things we can do using APIs, however, that will be interesting to watch unfold.

In terms of the big picture, I think change happens slowly and steadily. It’s easy to miss, including changes that can have tremendous impact on the industry. I’m not a big believer in Bitcoin or the related technologies. They seem more like solutions looking for a problem.

MH: Wells Fargo has been a leader in online and mobile banking on both the retail side, as well as wholesale banking side. Wells Fargo’s Virtual Channels Group has done great things, yet many startup pundits seem to say that big banks ‘don’t get it.’ How are you proving them wrong?

SE: We do not want to become an Innovation Group that publishes white papers and just does R&D. We are about being a catalyst for rapid execution.

One example is a California-based corporate client that asked if we could build a new technology solution for its customers. They were considering working with a startup. Wells Fargo built a custom solution within the timeline and exceeded their expectations. That’s what it’s all about: delivering benefits for your customers.

I’ll keep it brief, since I have guest blog post on Yodlee’s web site this week.

In it, I discuss a couple of themes I see as important to startups and incumbent players in financial services: the growing role of open API’s and UX (or focus on the user experience), a traditional strength of consumer Internet businesses like Yelp.

I’ll reiterate few points. Although API’s have been around for many years, my experience is that big banks have seldom focused efforts on them for internal or third-party integrations due to security, being slow to adopt modern development frameworks, and a need to focus on legacy systems. That simply needs to change.

I recently spoke with Joe Floyd, a principal at Emergence Capital about FinTech. We agreed many functions of financial services companies risk being disrupted by startups (such as LendingClub) and the role of API’s.

We envisioned – in the context of today’s mobile solutions and app-centric world – a world in which the user grants permissions to their financial apps – just as you allow apps like Twitter to access your contacts.

In this world, your financial apps – which may be from your bank or not – e – might have the ability to see your bank balance and move money between accounts. Solutions would focus on the user’s priorities, e.g. budgeting.

I also met up with former work colleague working in customer experience strategy at Wells Fargo. While Wells Fargo excels at this area, he was open about how far the bank has come.

Our talk reinforced my view that banks are seldom naturally strong at UX, given their focus on annual budgets, long development cycles, and numerous stakeholders.

Case in point: Contrast your average bank’s user experience with what you see at Betterment. Check out its web site or try its service and you’ll see why they’ve been called the “Apple of Finance.”

Yet banks can – with their deep understanding of client needs – achieve similar UX success by being more agile and user-centric.

As a glimpse of what it might be like, imagine instead of Microsoft Word, Excel and PowerPoint, your team uses modern collaboration tools, like Asana or Slack (winner of last week’s TechCrunch Crunchie award).

Without a doubt, at least some of the buzz with FinTech has been associated with online banking (and recently, mobile only) banks, such as Moven and Simple.

There are fewer startups in this space compared with either alternative lending or wealth management, yet it’s an important FinTech segment.

In truth, some are not true startups, but standalone offerings branded separately from their parent (e.g. Simple was acquired by BBVA, but operates as a standalone brand).

Some services, such as Bluebird from American Express, also aren’t truly banks, but position themselves as bank alternatives (offering mobile services with a debit card). Yet overall lately, it seems like a brand new world of banking. Or is it?

History

I’d like to put context around the rise of these pure play providers, and provide a view on why they might struggle to reach scale, yet shouldn’t be ignored.

For those less familiar with the US banking market’s historical peculiarities, due to the federal system and decentralized approach to regulation, for a long time it was fairly difficult in the US to operate bank branches across state lines.

With the passage of the Bank Holding Act, and other regulatory changes, together with rise of the superregional banks, and later consolidation due to M&A, interstate banking came into being over the last three decades.

Today the US has four big national banks – Bank of America, Citi, JP Morgan Chase, and Wells Fargo – yet is also is remarkable for its huge number of banking institutions (over 6,000) including local banks, credit unions, and the like.

First Wave of Online Banks

Beyond consolidation, technology started to enable a lot of things at banks to operate at scale, including the ability to serve clients from call centers. In the mid to late 1990’s, the US industry also saw the emergence of online banking.

While generally the banks, who traditionally have accounted for around 40%+ of the world’s technology spend, did not miss the rise of the Internet, there was a wave of startups that focused on disrupting traditional financial services.

Working in London for Gemini Consulting at the time, I was involved in the launch of egg, an online only bank from Prudential Assurance PLC, the UK’s largest insurer. It did well, meeting its 5-year growth target in 6 months, gathering $5B in deposits.

(My role was focused on the launch of Egg Investments as part of a stellar team including John Casey, Head of Product, my boss on the project, in particular partnership deals with content providers, such as Motley Fool and Morningstar, working alongside Rob Hudson, now at Aberdeen Investments in London).

Yet I’d be the first to say a more typical result of this wave of online banks was that of WingSpan Bank, which went from launch to swift demise within two years. The truth is most people value digital channels, but want other channels on occasion.

Second Wave – Online/Mobile Banking

After what a former boss calls “the lost decade”, when few FinTech startups made much impact, and innovation occurred in hardware, networking and then cloud-based software, we are seeing startups very much like the first wave of online banks.

Say what you will – heirs to same maverick spirit, a desire to remake banking, or just work at a place more like Google than the US Post Office, which how it felt working in banking at some points, I’ll admit, the new startups are getting some good press.

My goal is not to provide a comparison of any of these services, since that’s found on sites like SF-based NerdWallet, but rather share that my view is that these new startups will struggle, as did their precursors in the first wave of online only banks.

While technology changes, and game changers like AWS make businesses much easier to scale, I predict they will struggle to gain customers profitably, just as their forebears did. The business of banking requires scale, service, regulatory focus, a brand, and the incumbents have a lot going for them (even despite fact that US & UK customers do tend to dislike their banks).

I would look for many of the banks to get absorbed, and while I’ve read that Millennials prefer to use alternative solutions (and I wouldn’t write off the FinTech space around payments, such as Venmo or Apple Pay), I feel the acquisition of Simple by BBVA underscores a lack of ability to scale. I’ve already started to read predictions that Moven will be bought by PayPal in 2015.

We’ve seen this movie before. So, while Alex Sion, CEO of Moven said, “We’re heads down and hell bent on changing the world of banking,” when he jumped ship from Citi to join Moven in 2012, I remain skeptical about the outcome.

It’s clear Moven can raise money, has a superb PR team, and can forge alliances to build press, but look at how its banking app is rated on iTunes, Google Play store, or what people say on Credit Karma: It’s average. A recent summary from Business Insider shows how Moven ranks vs. competitors – and it’s not pretty.

This month’s launch of a Moven smart watch app generated lots of headlines, but to me was underwhelming. At the end of the day, the financial health app (which is really just a port of its mobile app) was simply not compelling vs. what some of the other innovators, like Intuit, are doing these days in FinTech.

The Banks

A key take away for me from the ratings for online banking and mobile banking is the banks are actually doing this pretty well by now (as well as offering multi-channel solutions), having invested and learned over the last few years.

Wells Fargo’s Digital Channels Group (recently renamed the Virtual Channels Group) is admired in the industry, and its online solutions win awards. I would even hold them up as a “FinTech company” to learn from in mobile and online banking. Borrowing a line from Marc Andreessen (“software is eating the world”), technology-driven banks are in many ways FinTech companies

Bank of America – led by great executives such as Paul Appleton, who works in retail bank strategy (and joined from Morgan Stanley, where I helped his team launch products/services, including online money transfer) – is viewed as an online banking leader. Some of my former co-workers at Hill Holliday, including Leslee Kiley, an EVP there, produce really outstanding work for BofA and its wealth management unit. (I worked at Hill Holliday for a couple of years, primarily working on the Fleet account, which was acquired by Bank of America in 2004).

JPMorgan’s known for its in online banking – serving consumer, middle market and corporate segments across a multi-channel infrastructure (managed by a former mentor, Yiannis Roussochatzakis). With a technology budget of over $20B, and a particular strength serving both consumer and small business/middle market consumers, BofA’s rightly well regarded. Focused upon online solutions for treasury/corporate clients, another former colleague, Nick Donohue (who worked with me in the Financial Services unit at Scient, along with Cesco Paola), delivers highly regarded solutions that are unlikely to be “disrupted” easily by an online only / digital bank.

One piece of news in the last week was that BankMobile launched what it claims to be the first mobile-only bank. The good news is that it seems pretty well done, but other news is – surprise – it’s a service from an existing bank.

To sum up my view on online banking: Go ahead follow the innovators, including venture-backed startups, but don’t expect them to scale. They can innovate, but at the end of the day, true disruption may be asking too much if history (and my own experience) is any guide.

One big caveat I would add is the global impact of mobile banking (given the % of the world with smartphones vs. desktop access to the Internet) is significantly different – but that’s a separate topic for later discussion.

What’s Ahead?

What’s ahead for FinTech as an industry in retail and mobile banking is still exciting since anyone can tell you that online and mobile banking, while pretty good today at the banks that really invest in user-centric design and technology (and service), can easily get better. Following the lead of Apple and Uber in payments, look for continuing innovations to come.

Open API’s, the emerging Financial Application ecosystem (such as with Yodlee Interactive), smart watches (and the Internet of Things in general) all still point to plenty of white space for startups and others to innovate.

Money 20/20 continued today, starting with a keynote by Ken Chenault, longtime CEO of American Express. What was interesting was both how much Ken embraced disruption, and versed he seemed in technology and his views on prospects that many conference attendees would be seeking to take market share from American Express. Beyond noting he welcomes competition, he stressed that he was not at all afraid to cannibalize his own business in order to reinvent AMEX.

Chenault said he “could care less” if plastic eventually goes away – eliciting a strong response from the audience, and sees AMEX as poised to continue to succeed in today’s more digital world. He also said he was disappointed to see Dan Schulman leave American Express to run PayPal, but expressed confidence he had a deep bench on his management team.

Chenault was excited that American Express was part of launch of ApplePay, and dismissed a question asking whether Apple could eventually disintermediate them, saying he doubts Apple sees that as their core business and seemed fairly unconcerned about MCX and CurrentC. I think that both sentiments are correct, although it is early stages of the game.

Next up was Tom Taylor, VP of Amazon Payment Services, extremely compelling speaker, and lot of the session was dedicated to a case study of a UK retailer, AllSaints, that essentially does everything (design, make & sell its own clothes; design, build and operate all its stores and web site using its own people) except for its strong partnership with Amazon.

Another good session was on payments for affiliate networks, marketplaces and direct sellers. Bill Clerico, CEO of WePay made good points about how handling marketplaces are very different from traditional e-commerce, with the need to manage the risk of buyers and sellers.

Another session — wittily called Planet of the API’s: Making Banking & Payments Programmable — explored how API’s can change how consumers will interact with their banks. Zach Perret of Plaid spoke on how creating an ecosystem of bank API’s could lead to all kind of new end-to-end experiences with online services that would not necessarily come from your bank.

While Yodlee CEO Anil Arora said he doesn’t see the need for every bank to publish its own API’s — it’s just a technology he said, and doesn’t solve anything in itself (and of course, his company has built out integrations with over 10k financial institutions, a source of competitive advantage for Yodlee). But Perret of Plaid took an alternative view, saying that Plaid expects to see at least 10,000 new start up’s / apps leveraging bank API’s over the next couple of years.

There were a couple of other good sessions today: Turning the topic to lending and the changing world of credit, there was an good discussion of alternative credit markets, with a roundtable featuring Ken Lin, CEO of Credit Karma, Aaron Vermut, CEO of Prosper Marketplace, Mike Cagney CEO of SoFi and others.

Key take away is that these companies are all solving for different issues in the current credit marketplace, where some find it difficult to obtain credit, or overpay due to market inefficiencies. Most agreed peer-to-peer term is overused, and emphasized use of risk models, data, and fact they acquire customers in new and traditional (direct mail!) models, just with a different mix.

The last session of the day was a debate on ApplePay, featuring Jim McCarthy, Global Head of Innovation and Strategic Partnerships at Visa, and Jim Smith, EVP and Head of Digital & Direct Channels at Wells Fargo, among others.

Jack Stephenson, SVP of First Data, commented on the “reality distortion field” attributed to Steve Jobs, being a factor, on some level, in that he’s never seen anything as big and complex come together until this effort to work with Apple.

Jim Smith said his team had been looking “for some time” for the right model for mobile payments, and were excited to be involved in the launch of Apple Pay, which will bring together banks, card networks, merchants and the right security model.

But many said it’s still early in the game, and Google Wallet will continue to evolve, with some noting that partnerships with biometric firms and other changes leveling the playing field, while adding the media were “missing the point” with MCX vs. Apple Pay story, a view supported by the team at Paydiant, the Boston-based software platform behind MCX.

A fitting end to the recap for today’s events at Money 20/20 – an event that some said might as well be called ApplePay 20/20 – with the day’s chatter commenting on the fact that Money 20/20 had just been bought by a European company (no word on whether the payment would be made in Bitcoin).